Maryland’s Legislature has passed House Bill 352 (HB352)(Opens a new window)(Opens a new window), which introduces major changes to individual income and sales taxes, with varying effective dates. Passed in April as part of the FY2026 budget, the bill is awaiting the Governor’s signature.

Individual income tax 

Unlike most states, Maryland applies a two-tiered income tax on resident and nonresident individuals including a state income tax plus local supplemental county tax (a flat 2.25% supplemental tax for nonresidents) for a total state and local combined income tax.

The legislation restructures Maryland’s individual income tax brackets, adding new brackets increasing marginal tax rates on high-income earners for tax years beginning after Dec. 31, 2024:

• Individuals
  • 6.25%: taxable income of $500,001 through $1 million
  • 6.5%: taxable income over $1 million
• Filing jointly
  • 6.25%: taxable income of $600,001 through $1.2 million
  • 6.5%: taxable income over $1.2 million

Prior to this legislation, the highest state income tax rate was 5.75%.

The legislation also raises the cap on the supplemental county income tax rate for residents from 3.2% to 3.3%, providing more flexibility to increase local income tax collections. In lieu of the supplemental county income tax, nonresidents will continue to be subject to the lower supplemental nonresident tax of 2.25%.

In light of additional tax brackets and the increased local tax ceiling amount, the highest combined marginal state and county level income tax rate for residents will increase from 8.95% to 9.8%. The highest combined marginal income tax rate for nonresidents increases from 8% to 8.75%.

Additionally, the legislation imposes a 2% tax surcharge on net capital gains of individuals with federal adjusted gross income (AGI) exceeding $350,000 for tax years beginning after Dec. 31, 2024. Gain from the sale of certain assets is excluded from the surcharge imposed, including but not limited to sales under $1.5 million of a primary residence, deferred compensation plans, livestock, and property used in a trade or business that is deductible under IRC Section 179 (generally tangible personal property subject to income tax depreciation). 

Finally, HB352 changes the method that electing pass-through entities calculate the pro rata amount of elective pass-through entity tax (PTET) due for its resident members. Currently, pass-through entities calculate the amount of PTET due on both the distributive share of resident and nonresident members based on their pro rata share of Maryland apportioned pass-through entity income. For tax years beginning after Dec. 31, 2025, the resident member’s pro rata share of PTET due will be based on “the member’s distributive or pro rata share on income” without the application of in-state apportionment.

Sales tax

The legislation expands the definition of “taxable services” and imposes a 3% sales tax on the newly included services. This expanded sales tax would affect information technology and data services, cloud computing services, and website development services. These services that are currently fully or partially exempt from sales tax will now be subject to this new levy beginning July 1, 2025. 

The new “taxable services” are determined based on activities defined under the North American Industry Classification System (NAICS). The specific NAICS Sectors included in the expanded definition are:

• 518(Opens a new window)(Opens a new window): Computing Infrastructure Providers, Data Processing, Web Hosting, and Related Services
• 519:(Opens a new window)(Opens a new window) Web Search Portals, Libraries, Archives, and Other Information Services 
• 5415(Opens a new window)(Opens a new window): Computer Systems Design and Related Services
• 5132(Opens a new window)(Opens a new window): Software Publishers

Any such “taxable services” involving business to business transactions that were previously exempt will now be subject to the 3% sales tax.

To the extent that a different tax rate could be applied to a sale or use of tangible personal property, a digital code, a digital product, or a taxable service from the 3% rate discussed above, the higher rate will apply to that sale.

Finally, the sales and use tax rate for cannabis will be increased from 9% to 12% beginning Jan. 1, 2026.

Corporate income tax 

A prior version of HB352 provided for the adoption of unitary combined reporting for purposes of the corporate income tax. This change was omitted from the final version of the bill sent to the Governor. 

What does CohnReznick think? 

Taxpayers in Maryland should be mindful of the impact the legislation may have on their income and sales tax obligations. The changes have the potential to increase the amount of individual income tax due for high-earning individuals. As such, additional consulting and analysis may be warranted to determine the impact the legislation will have on individuals. Taxpayers are encouraged to consult with their tax advisors to determine the effect of the legislation on their own circumstances and to plan for any potential tax mitigation efforts.

Service providers also may be significantly impacted by the legislation. Careful analysis is required to determine whether a taxpayer’s activities will fall under the scope of services now subject to the sales tax. Those operating within one of the NAICS Sectors detailed above or taxpayers providing similar services or Software as a Service (SaaS) should be particularly vigilant and consult with their tax advisors to assess their Maryland sales tax compliance obligations.